“Something that moves 20% overnight does not feel like a currency. It is a vehicle to perpetrate fraud." Lloyd Blankfein, senior chairman of Goldman Sachs, made this infamous statement about Bitcoin in 2017. The cryptocurrency’s success hasn’t swayed him much. Recently, he told CNBC, “If I were a regulator, I would be hyperventilating at the success and arming myself to deal with it.”
These misgivings about crypto and DeFi are not entirely unfounded. Frauds and hacks within the DeFi space amounted to $240.4 million between January and April of 2021.
While no one can argue about the volatility of crypto, there’s much more to blockchain technology than opportunistic investments goneawry. Institutions in the financial sector are fast adopting blockchain and distributed ledger technology.
An IBM report suggests that 91% of banks had invested in blockchain solutions by 2018 and the growing adoption rate points to an expected normalisation of blockchain usage in the financial sector.
How blockchain can address the problems facing the financial sector
The financial industry is plagued with mountains of paperwork, perilous data breaches and redundant processes that have only added to its massive losses and lack of trust from its consumers. Using blockchain in financial services can go along way in alleviating these problems.
Blockchain will bring security and transparency to the financial industry
Centralized financial systems are opaque, with security dependent on intermediaries and databases. This means that nobody will know what’s going on until after a system has been hacked.
Blockchain can solve both these problems at one go:
Zero-Knowledge Proof: this cryptographic method allows the proof of information without revealing it and separates the data verification from the data. Financial institutions can carry out user verification without access to the data, lessening the chances of breaches.
Financial institutions can reduce costs with blockchain technology
Multi-layered, centralized financial institutions invest heavily in purchasing, maintaining and securing central databases. Added to that are other recurring costs like bookkeeping, value transfer systems, commissions and labor.
According to a Finextra study, DLT can reduce these overhead costs by $15 - $20 billion per year by 2022. In the process, DLT can also increase transparency and ensure security. Banks can implement smart contracts to reduce costs of commissions to intermediaries, value transfers and bookkeeping.
Blockchain can control risks associated with financial transactions
The financial industry provides high-risk services like loans where the counterparty may not meet obligations and credit risk due to misinformation. Monitoring and tracking loan use are also ineffective since banks have to trust third parties.
Blockchain can sufficiently eradicate risks by making each stakeholder a trusted node that will enable:
Peer-to-peer (P2P) transactions, which will eliminate intermediaries
Record and verify all transactions on the blockchain network and reduce credit and fund management risks
Quick settlement of transactions through smart contracts
Further, data immutability will also increase the reliability of transactions.
Blockchain can carry out instant financial settlements
An average financial settlement involves several back-and-forths between the front and back offices of a bank, currency exchangers halfway around the globe for cross-border payments and multiple layers of process scrutiny. No wonder settlements are lengthy and expensive.
Blockchain can bring better auditing and promote transparency in financial systems
Not only is auditing a long and expensive process, it doesn’t leave room for transparency in a centralized system. In current financial systems, auditors are allowed to show specific pieces of information while shrouding others. This is a source of unethical behavior and non-compliance.
Since records on a blockchain are immutable, auditors can check them for compliance and decipher what’s happening in a financial institution. It will not only streamline the process but bring much-needed transparency and curb unethical practices.
These are just some of the ways blockchain is taking the financial sector head-on. In the second part of this article, we’ll explore theblockchain applications in the financial industry.
Blockchain will continue to disrupt financial and other markets in the foreseeable future. Without integrating blockchain into your business strategy, you’ll undoubtedly get left behind. Find out where to start and the next steps to make the most of the opportunities in blockchain in our Oxford Blockchain Strategyprogramme.